Why Do We Need PLM to Control Product Cost?

I’d like to continue discussing topics that create maximum confusion between PLM marketing and reality. Today, I want to talk about one, that probably in the top list of all manufacturers – product cost. Yes, you want it down, no doubt. If you will talk to PLM marketers, they will all tell – PLM is the way to go. However, how magically it will happen? Why PLM can help you manage cost? How practically it will happen? I decided to discover the potential answers on these questions today…

Let me think about a traditional manufacturing environment that is not going to implement “PLM strategies”, but indeed is looking how to decrease cost of their products. The most reasonable approach is to ask different business units to develop their cost saving programs- R&D, Manufacturing, Supply Chain, Support. I believe, these organizations will be able to deliver decent results. Now, depends on manufacturing type, they have various chances to be successful. For the long run, the company manufacturing the same (or similar) products will be able to optimize cost of products. Their best chance to do so, will be for mass-manufacturing products. Within the time, all functional areas will be optimized and learn from the experience how to manage product costs for what they are doing. There are two potential problems in this approach. First is the time scale and the second production volume. What does it mean?

Time Scale in Manufacturing
With a significant time period, your manufacturing organization has a good chance to develop reasonable good product cost practices. Designers will find optimal solutions, right suppliers will be designated and subcontracted, manufacturing facilities will be optimized, etc.

Production Volume
The previous assumption of time scale will be working if you will continue to manufacture big series of products. With growing number of manufactured items, your product cost will go down.

What is the problem with such assumptions? The only one, in my view. This is less and less happening in modern manufacturing. Market demanding customization in production and due to that time and product volume is going down. So, manufacturers need to manage very flexible practices in their environment to maintain balance between production volume, time and cost.

Now, I want to get to my original question. How PLM can help? PLM is managing product data and processes. How product cost will be resulted from that? My answer – PLM need to facilitate cross-functional IT functions in the organization. Your functional domains are separate. Most of the systems in today’s IT are department oriented and rarely have global organizational exposure.  PLM need to make a success in cross-functional data and processes management. This will be a key for PLM success in the organization. And this is still not happenings…

What do you think about that?
Best, Oleg

22 Responses to Why Do We Need PLM to Control Product Cost?

  1. Eric J says:

    We tackled just this issue implementing a revolutionary co-designed PLM software product with Centric Software. We focused on cost & schedule as our main tenants to a successful launch.

    In the profitability planning software we have the ability to project the cost of products with a long lead time, take into account currency exchange rates, snadbox different cost structures, manage volumes of products by retail channel…to name a few.

    It was this business approach that has already yielded a measurable ROI. Management was reluctant to implement a software package that formalized our current processes or data, it was the ability to more quickly analyze cost scenarios in helping plan NPD spend that green-lighted this project.

    check them out

  2. Eric, Thanks! It sounds interesting, I will check it out. However, my question is about different cost elements. They spread out different system in organizations. How did you handle combination of them using Centric PLM? Best, Oleg

  3. AndyF says:

    Cost is an interesting subject, I think it is much more complex than managing CAD data. Most PLM systems have roots in the PDM world which is actually quite simple when compared to the costing side of things. Cost information is spread across the entire value chain and it isn’t limited to just a single system such as CAD. To gather up all of the relevant cost information you need to reach into the ERP systems and the procurement systems, maybe accounts payable. Depending on the manufacturing model used in the company you might need to access internal manufacturing process systems that provide details on quality, rework, scrap. You might also want to grab data from service systems in order to track warranty failures, service costs, and repair costs. You might also want to gather information on shipping costs as well as shipping damage. There are a lot of areas where product costs come from and a good costing system needs to be able to gather all of that information.

    I’ve never seena PLM system that was any good at product costing nor have I come across many PLM sales people that even know much about the subject. In my experience we’ve always built our own cost systems internally becauase nobody sells anything really good off the shelf.

  4. Andy, I found your comment about the cost very much connected to your last “mashup” comment. Actually cost information is spread out of multiple sources. I have seen initial “cost solutions” as part of bill of material modules in PLM, but found it very pre-mature. Best, Oleg.

  5. John says:

    Hello … i know – this is an old blog. But very good! I am cost manager in switzerland, germany and ausria. Before i changed my focus on production cost i worked as a plm consultant for dassault products. I’ve done a lot of plm projects in the past where production cost was no issue. Now – we feel a change in the industry. I think one reason is the economic situation. What should be the focus in cost management? Cost transparency in a very early stage! Our method is to combine cad data – as the “source” of later production costs – with costs, lotsizes, mgk and fgk. We implement the process “target costing” at the companies. I was really surprised about the issue, that a lot of companies do not have target cost ! It starts in the management – where a lot of manager are not able to combine customer benefits and functions of their products. Target Costing is a good way to focus on cost and customer benefits. And that’s an important part for good business. The process starts in the engineeering .. to give the engineers a tool to compare target cost with actual production cost directly in the cad. That brings cost sensitivity to the engineering departement. Management define target cost. The engineering, the purchse departement and the manufacturer working together for the cost transparency (include ERP data). All these cost information we bring to the cad system – for full cost transparency in the company.

  6. Hans Peter, thanks for your comment! You’re absolutely right. To have the ability to compare cost on a very early stage can be extremely beneficial. I’ve seen SolidWorks is coming with cost solution in 2012.

    Have you seen that? What is your opinion?

    Best Oleg

  7. John says:

    Hello Oleg … I know this solution very well. It’s a classical feature based solution. I see some problems with feature based calculation:

    1) The knowledge, how to manufacture and produce a part is often not inside the company. In europe, many companies outsourced their manufacturing. The trend holds … To setup this feature based solution the knowledge is missing.

    2) The knowledge of “the market” is not implemeted. The “where” is very important.

    In general: My experience shows, that engineers are not very interessted in costs. They got a lot of other problems to solve. Per part maximum 20-30 seconds. The goal is, to bring the economic view to the engineers with a very simple tool and process. Just click a button, and know about “within the target” or not. The calulation is composed from CAD, PDM, ERP and very specific algorythm (regression).

    But Target Costing is first of all a “mindset”. If a company is able to change their employees mind – they won. It needs new processes to do that. Sometimes you must be radical … never start a project without target costs and costs per assembly! Very important: Responsibility. A change in the bonus system of the company is sometimes needed. Pay a bonus – if the project team is undercut the targets! As a specialist in bringing target costing to companies i’ve seen a lot …

    Regards !

  8. John, thanks for sharing your opinion. If “feature based” solution can provide an assessment of target cost, what is wrong with that approach? I agree, in many cases, data is not available. Especially, it is right in case of outsourcing. Maybe we can expect from suppliers / manufacturers to make this data available? What’s your take? Best, Oleg

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